Bankruptcy or insolvency is a legal designation occurring when a company or entity are unable to repay debts.

While associated mainly with business, individuals can also declare bankruptcy.

Persons or companies can voluntarily declare bankruptcy, involving filings with courts by their own accord.

This differs from involuntary bankruptcy in which debtors force individuals or companies into bankruptcy by filing a petition with the courts. Bankruptcy can only occur with a court filing.

Of note, bankruptcy is a legal stat and once the petition is filed with the appropriate court, local and state laws vary greatly.

Understanding the Different Types of Bankruptcy

In the United States, bankruptcy may take several forms and can be referred to as Chapters 7 and 11, 12, and 13.

Chapter 7 is a liquidation procedure, where all assets are sold, and the court oversees the distribution of the money to creditors based on their standing.

Both businesses and individuals can file for chapter 7. Chapter 11 is a reorganization process where businesses can freeze their debts and continue to operate.

In contrast, a method and procedure are negotiated through the courts to satisfy the obligations of the company.

Meanwhile, Chapter 13 is called a wage earner plan and helps people attempt to restructure their debts to repay their debts.

This can include some debt forgiveness by creditors or reduced interest rates or balances.

Not all private persons are eligible for Chapter 13, high amounts of debt don't qualify, and the person must file Chapter 11 or 7.

Many individuals opt for Chapter 13 over Chapter 11 or Chapter 7 because it helps them in avoiding foreclosure on their residence.

The filing of bankruptcy is considered a last resort when businesses and persons have not been able to negotiate terms directly with their creditors.